Brief on Team’s 2020 Q1 Performance

With the market plunging over the past two weeks, most are focusing on the price action. As an investor, it is important not to forget the business behind the counter. And by focusing on the long term aspect of the business, then one will not worry too much about if the price is going to continue to drop or if the price recovery will be V-shape or U-shape.

The pandemic of Covid-19 will affect all businesses but magnitude of impact will differ. Hence, it is important that the businesses I invest in can withstand the crisis and return stronger when it is over. For the latest quarter, I am satisfied with the overall performance of the team. Strong defensively with some sparks in the attack.

Earlier in the month, I have written a brief on REIT’s Q1 performance, so I won’t repeat it. I will only be highlighting the companies performance  and what caught my eyes. For details, please refer to companies’ reports and presentations.

Defenders

3.6% growth in revenue and 5% growth in net profit (excludes one off) for VICOM. Given its more than 100% dividend payout, cash drops from 104 mil to 93 mil. Final dividend (excludes special dividend) increases by 4.8% to 24.29 cents. Adding the interim dividend of 14.11 cents, the total dividend per share stands at 38.4 cents. The total dividend will amount to 34 mil, which will be 4 mil higher than its net cashflow.  VICOM is enjoying some tailwind from the increase renewal of COE and decreasing de-registration rate. However, management indicated non-vehicle testing business is expected to remain challenging given the economic uncertainties.

Given its strong balance sheet, I believe VICOM should be able to continue pay out at least 36 cents dividend per year for the next few years. I took some money off this counter so that I can buy more OCBC.

Micro-Mechanics is poised for growth this year as evidence from its Q2 revenue growth of 7.4% and net profit growth of 14.4% after several quarters of decline. However, short term outlook becomes uncertain due to Covid-19. MM surprises with an increase in its interim dividend by 1 cents to 5 cents.

I am cautiously optimistic that this is an indication of management’s confidence of the year ahead.

Valuetronics did not report Q3 results as they have decided to switch to semi-annual reporting. The group made and announcement that they are expecting lower revenue for the second half of the year due to delay in resuming their operations.

Not overly concern about it as things should look brighter 2 to 3 quarters later. With its strong balance sheet, I can only hope that the management will continue to maintain its dividend.

Midfielders

Disney reported 36% growth in revenue. Diluted EPS excluding certain items affecting comparability dropped by 17%. The contrasting top line and bottom line is expected due to recent Fox acquisition and development of Disney+. Sign up rate, conversion from free to pay and churn rates for Disney+ were better than what management expected. The damper is HK and Shanghai Disneyland which are currently shut down due to Covid-19.

Continue to believe in its magic and transition pain should become gain in a few years time.
After note: Bob Iger announced his handling over of CEO position to Bob Chapek last week. While I would like Iger to stay on as CEO, I am not too perturbed by it as he is still with the group as Chairman. Also, after working his charm and completed the taking over of FOX and starting Disney+, Chapek could just be the correct fellow to put the processes in place and stabilise the group for the next few years.

Apple reported record quarterly revenue of $91.8 billion, an increase of 9 percent, and quarterly earnings per diluted share of $4.99, up 19 percent. A glance at the earning transcript review that the company is off to a great start in all segments. Particularly pleasing for me is the continued growth of its services with its revenue up by 17% to 12.7 billion.

With a large active installed base of its devices, Apple services will provide its next phase of growth and I am hoping that it will contribute to 30% of its revenue eventually.

Raffles Medical continues its steady performance with a revenue growth of 6.7%. Net profit decreased by 14% due to gestation of RafflesChongqing. A quick look at the cash flow statement shows the cash flow from operation increases by about 19%.

No complain and will continue to hold this counter for long term. Last week I have sold some of its shares to raise cash for my purchase of DBS.

OCBC has a good quarter with a 34% growth in net profit. For the full year, earning increases by 8%. The management also proposed an increase in final dividend to 28 cents, bringing the total dividend for the year to 53 cents.

It will remain a good dividend machine for the long term, so I have added more shares over the past week and will probably add a bit more in the coming week.

Forwards

Starbucks posted a consolidated revenue growth of 7% and  diluted EPS up by about 21%. Similar to Disney, the damper is the Covid-19. The only reassuring data is that China currently on takes up 10% of  its global revenue and operating profit is slight more than 10%. I am still positive of its mid to long term prospect and think the impact due to Covid-19 will be temporary.

The strength of its brand should bring it to a greater height after the crisis.

Due to delay in orders by both Microsoft and Facebook for its cloud solution, Arista Networks reported a weaker quarter with revenue down by 15.6% and flat non-GAAP EPS.  For the full year, revenue is up by 12.1% and non-GAAP EPS is up by 22.2%.

The positive from 2019 is the entry of Arista in the campus and mainstream enterprise. Our cloud networking technology is being accepted in thousands of diverse enterprise customers. The growth in this segment cannot completely compensate the clouds volatility yet but should become an important growth driver in the future.

I still believe in the strong leadership of the company and that they will be able to overcome the current blip and continue to grow the company.

Ulta Beauty‘s total sales for the year increased 10%. Its comparable store sales increased by 5%. and EPS grew by 11%. This is achieved despite the downturn for the makeup segment during the last few quarters. Skincare is the star for the year and the group is on track to expand into Canada by 2021. Due to Covid-19, the group has stop certain in-store services but has yet to  quantity the impact yet. E-commerce platform seems to stay strong.

Positive about what the company is doing and hopefully its overseas expansion will bear fruit in 5 years time.

Illumina reported a 10% rise in revenue and 29% growth in diluted non-GAAP EPS for Q4. For the year, revenue is up by 6% and non-GAAP EPS is up by 15%. A leader in sequencing instruments for genetic, it has been tough year for the group with its lower than stellar growth and its failed acquisition of Pacific Biosciences. The group is launching new systems in 2020 and has just announced collaboration with Roche on adding new companion diagnostic claims. Near term, there should not be much impact but hopefully this will bear fruits in the future.

Still very new to this company and will continue to learn about its business. Have pared down my stake due to lack of familiarity.

Booking

I have divested my stake before it announced its latest earning. So no update here.

Final thoughts

The coming two years results will be affected by this one-off event of Covid-19. So the numbers might not be as useful. However, it will be a good opportunity to observe how the companies deal with crisis and that should provide me some inputs to refine my team further.

Based on the current quarter’s results, I decided to make some changes to the team for the next quarter. Intuitive Surgical and DBS would be brought in to replace Booking and Illumina. Intuitive Surgical would join Ulta Beauty and Arista Networks at the attack. DBS would join OCBC in the midfield. Disney and Starbucks would be on the bench.

I am confident that the future of this team will be bright.